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Section 14A Disallowance -Gulshan Investments ITAT Kolkata Decision

Section 14A Disallowance -Gulshan Investments ITAT Kolkata Decision

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ITAT , Kolkata has vide its order dated 11.03.2013 in DCIT, cir 6 vs Gulshan Investment Co Ltd (Asst Yr 2008-09) has held that the disallowance u/s 14A in case of shares held as stock-in-trade can be done only for direct expense and Rule 8D is only partially applicable.
ITAT , Kolkata has vide its order dated 11.03.2013 in DCIT, cir 6 vs Gulshan Investment Co Ltd (Asst Yr 2008-09) has held that the disallowance u/s 14A in case of shares held as stock-in-trade can be done only for direct expense and Rule 8D is only partially applicable.

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Categories:Types, Business/Law
Published by: India Tax Made Simple (taxworry.com) on Mar 17, 2013
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Deputy Commissioner of Income-tax, Circle 6, Kolkata
Gulshan Investment Co. Ltd.
 IT Appeal No. 666 (Kol.) of 2012[ASSESSMENT YEAR 2008-09]Date of pronouncement
Pramod Kumar, Accountant Member 
By way of this appeal, the Assessing Officer has
challenged correctness of learned Commissioner (Appeals)’s order dated 21st January 2011, in
the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter 
referred to as ‘the Act’) for the assessment year 2008
-09, on the following ground:That on the facts and circumstances of the case, learned CIT(A) erred in law in holding that thedisallowance under section 14 A of the Income Tax Act, read with rule 8D of the IncomeTax Rules, is not applicable in the case of the assessee since the shares were kept as stock intrade. The CIT(A) should have upheld the disallowance made by the AO.
The appeal is time barred by 10 days, but the Assessing Officer has moved a condonationpetition, duly supported by an affidavit. Learned counsel for the assessee does not object to theprayer for consolidation. In this view of the matter, and having regard to the material on record,we condone the delay and proceed to take up the matter on merits.
The issue in appeal lies in a very narrow compass of undisputed material facts. The assesseeis engaged in the business of share trading. During the course of scrutiny assessmentproceedings, the Assessing Officer noticed that while the assessee has earned dividend incomeof Rs. 18,91,556, the assessee has not made any disallowance under section 14A in respect of 
“expenses relatable to the above exempt income”. The Assessing Offficer als
o noticed that theassessee had paid interest of Rs. 10,34,315. On these facts, the Assessing Officer computedthe disallowance under section 14 A r.w.r. 8 D as follows:
Disallowance under section 14A :
During the relevant year, the assessee had earned dividend income of Rs. 18,91,556/-. It wasfound that the expenses relatable to above exempt income has not been included back tothe total income for taxation. (2) Assessee paid interest for Rs. 10,34,315/-. As per point 2 of Rule 8D Rs. 7,97,762/- is disallowed. As per point (3) disallowance is worked out as section 14Aread with Rule 8D of the I.T. Act as under :-
Opening value of stock-in-trade:Rs. 20,17,95, 911Closing value of stock-in-trade:Rs. 33,72,25,080 Average stock-in-trade:Rs. 26,95,10,496½% of average stock-in-trade:Rs. 13,47,552Total addition under section. 14A:Rs. 21,45,314(i.e. Rs.13,47,552 + Rs.7,97,762)
Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter inappeal before the CIT(A). Learned CIT(A), after elaborately reproducing the written submissionsof the assessee, concluded as follows:I have duly considered the observations of the Assessing Officer and submissions of theassessee. The assessee did not show any expenditure on the exempted income or disallowance under section 94(7) in the return of income. There cannot be any income withoutany kind of expenses or labour howsoever, small it may be. Therefore, the Assessing Officer was justified in calculating the disallowance on the exempted income. During the appellateproceedings the appellant was asked to file the details of share dividend earnedand calculation of loss disallowable as per the provisions of section 94(7). The appellantsubmitted the details of all the shares and has calculated an amount of Rs. 1,57,227/- to bedisallowable as loss against the dividend income under provisions to section 94(7) of the I.T. Act, 1961. The assessee does not have any investments and all the shares are being heldas stock in trade only. Therefore, the assessee submitted that no deduction can be made on
account of expenses. Following the judgments of Hon’ble Kerala High Court i
(Kerala High Court)
ITA No. 1784 of 2009 and Hon’ble ITAT, Mumbai iln the
case of 
Yatish Trading Co. P. Ltd 
. v.
(ITAT Mumbai)- ITA No. 456/Mum./2009(10.11.2010) relied upon by the assessee in the written submissions, it is held that Rule 8D isnot applicable in the case of assessee since there are no investments and all the shares werekept as stock in trade only and further no interest expenses have been incurred for investments.However, section 14A is still applicable where it provides that no deduction in respect of expenditure incurred by the assessee in relation to exempted income will be allowed. There areexpenses incurred for earning dividend income as well as earning of the business income. Thedividend income may not involve separate/ direct expenses but indirect expenses are there in
purchasing those shares and otheradministrative expenses in the earning of income. Thesection 14A does not take care of only direct expenses but indirect expenses are also to beallocated to the exempted income. There may not be any investments for making Rule 8Dapplicable in the facts of the appellant. Rule 8D is a method prescribed when the dividendincome is earned from investments. Therefore, in the facts and circumstances of the case of theassessee the expenditure is estimated to be @10% of the dividend earned, as fair andreasonable estimation. Therefore, an expenditure of Rs.1,89,155/- is disallowed in addition to anamount of Rs.1,57,227/- as disallowance under section 94(7) in relation of earning of dividendincome. This ground of appeal is partly allowed.
The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appealbefore us.
We have heard the rival contentions, perused the material on record and duly consideredfactual matrix of the case as also the applicable legal position.
We consider it appropriate to begin with reproducing Rule 8 D of the Income Tax Rules,which is as follows:Method for determining amount of expenditure in relation to income not includible in totalincome.8D(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previousyear, is not satisfied with-(
) the correctness of the claim of expenditure made by the assessee; or (
) the claim made by the assessee that no expenditure has been incurred, in relation toincome which does not form part of the total income under the Act for such previous year,he shall determine the amount of expenditure in relation to such income in accordance with theprovisions of sub-rule (2).(2) The expenditure in relation to income which does not form part of the total income shall bethe aggregate of following amounts, namely:-(
) the amount of expenditure directly relating to income which does not form part of totalincome;(
) in a case where the assessee has incurred expenditure by way of interest during theprevious year which is not directly attributable to any particular income or receipt, an amountcomputed in accordance with the following formula, namely:-
 A x BC

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